Barron's had an article in this week's edition about the mistakes that investors makes that result in falling short of the S&P 500 or even the mutual funds they own.This is something that has come up before, human nature is a pretty big enemy where long term success in the stock market is concerned.
The first crucial error cited is not diversifying properly. Quite simply by avoiding big bets and allocating a portion to many asset classes you won't get taken down by one bad bet and you give yourself a better chance of having something that is going up.
As you look across the entire market there are clearly some groups and individual names that are doing just fine such that you'd have no idea the market is down almost 12% YTD by looking at them.
I've got a bunch of names that are up or down 3% YTD which offsets nicely the ones down more than that YTD 12%. I've been writing about this for ages; this is not about good stock picking it is about good diversification which is a whole lot easier.
The next mistake cited is timing the market, many people try to do this and get it wrong. I do believe in using the 200 DMA, which is a timing tool, but it has given a few headfakes over the last few years which is why avoiding big bets is so important. Further I think the 200 DMA as a measure of how healthy demand is is a very simple tool that is not triggered all that often but it is the type of thing (like other timing methods) that can cause problems if used too aggressively.
As I have mentioned before if you just buy an index fund, add to it over time and just hold (assumes proper adjustments to asset allocation) it you will capture the market's long term average (save for the OER). All of the other things we try to do, trades made, studying we do, new ideas we implement all work against the fact that buying an index fund and just holding will deliver a very competitive result at the end.
However that also means enduring every bit of bear market, financial crisis, housing slump, war event that ever comes along. I do believe that active decisions can smooth out the ride against these events (you can look at the last few quarterly recaps to decide for yourself about that) and that is a big part of the content here but if you are trying to add value in this manner you should not lose site of what it means to buy an index fund and just hold it.
It's been a little warmer here the last couple of days which means we'll be seeing horny toads here soon.
20 comments:
The decision to buy and hold index funds boils down to one question. Do you believe there will be another great depression in your life time? If the answer is no, then I agree with everything you are saying in your blog. On the other hand, if a great depression is in our future, then timing is a matter of survival for all retirees and wannabe retirees who can not wait 20-30 years for the market to recover from 80%+ losses.
I realize the financial system is more sophisticated now than in the 30's, which reduces the chances of another depression. But humans are not infallible, as the current subprime mess clearly demonstrates, and greed and stupidity can lead to another 80% haircut, not unlike the early 30's.
I'm not saying a depression is just around the corner. It may not happen for another 10-15 years. The point is that I believe one will happen in my lifetime. As a result, I am a dedicated market timer.
Sorry for the depressing (pun intended) commentary. I guess I see the glass as half empty.
Greg, you probably know my preference for being proactive re down a lot.
That being said the longer term average includes the depression.
If the top is in to a 14 year great depression-like stock market, then a 50 year old who continues to DCA in every paycheck will be buying all the way down, buying when it is cheap and buying all the way back up.
Remember the bottom in the 1930's came fairly early, the time period always cited is how long it took to get back to even.
Let me be clear I believe in and take defensive action.
A 62 year old investor faces a scarier problem if the top is in to a depression but asset allocation becomes more important or here is a better case for a defensive strategy.
I believe that allocation also means the determination of how much equity in your portfolio. 100% equity probably may not be right for the retirees. Another factor is your tolerence to risk, if you can not stand losing more than 10% in bad years you probably should have 50% or less in equity.
everybody times the market.
Investors do not fall short just because of diversification. Even the ones that only invest in an S&P 500 fund fall short of the S&P 500 benchmark.
The most glaring reason is that the ones that refuse to "time" the market do not sell on the way down. Rather they hold all the day to the bottom and then capitulate at the very bottom.
The difference between the ones that try to reduce/exit on the way down and the buy-and-hold crowd is that the latter sells at the very bottom.
Once they sell, they get scared of buying till the market gets giddy again and then they "buy-and-hold" at the top.
by the way, last fall i pointed out several times that I expect the S&P to retrace 50% of the up leg from 2003 to 2007. That works out to about 1200 on the S&P, which also coincides with the 25% from the peak that you pointed out.
Well, we are almost there, about 80-90 points to go. I believe the selling pressure will slow down after that. We will probably consolidate for a while while new leadership/sectors emerge.
i'm getting a notice you have a Trojan virus on this website. I have Microsoft Onecare.
Ron
Well said, born2Code. Another trap many people fall into is thinking they're diversified by having a slew of funds only to find in a downturn the funds all have a big chunk in 1 particular sector. I think random alluded to this a few days ago vis-a-vis an investment in Australia adding heavily to your commodities/natural resources exposure, thereby perhaps leaving you with more in those sectors than you really intended.
Ron, i don't know the context of trojan virus as it relates to "on this website." Are you saying it is embedded in one of the links, in a video, in someone's comment?
I have never heard of Microsoft Onecare, is it ever wrong or mis-diagnose.
I'm not sure what to do with this info. If anyone has any ideas it would be much appreciated.
There is some kind of pop-up getting launched when you click on the "comments" link. Not sure what's triggering it, since it does not launch on your main page.
huh, not on Mozilla
blogger has had all sorts of quirks come and go in the time i have had the site maybe its just that????
we'll see
FWIW, I'm getting a pop-under when I click on the comments section. Nothing malicious, healthcare related (probably intentionally designed to upset me since that's the one defensive part of my portfolio that hasn't performed up to snuff.) It's somehow by- passing my security software.
Roger, there's definitely a new pop-up server operating on your site. I'm seeing a data feed from ads.clicksor.com and the feed is not very discriminating either; e.g., a couple of relatively innocuous ads touting phones and sportsnet but also a porn site ad.
I'll contact blogger support to see if they can help with this.
I don't suppose you know anything about how to get rid of it?
Strange, I have yet to encounter the pop ups.
thank you
Roger, the ad server seems to have some basic "intelligence" -- I think I only saw multiple ads because my browser (Firefox) is set to flush data (cache and history) every time I exit the program so when I turned the pop-up blocker off to see what was happening on your site the ads started coming through but I had to exit and re-enter to see a new one. It may be that you would need to flush your browser's cache and history while making sure your pop-up blocker is turned off in order to see an ad, can't say.
In the meantime I think you'll probably need blogger support to help you with this (unless you've developed some XML coding skills in the past year). Need to get that sliced out of the blog's code without damaging anything.
Aside from introducing something to your site that you may not want (pop-ups) this would likely be more annoying than anything else except for that lack of discrimination I mentioned: I just tested again and it served an ad for an online gambling (poker) site with a particularly ...um, well-endowed dealer. No problem for me but I suspect you have some visitors who would not be edified (and then there was that porn site ad which was, shall we say, very explicit).
i have changed templates as i found some info that said it could be in the template somehow.
I looked for anything odd, but did not find anything, further i ran some spyware nad it found no sort of malware.
please adivse any pop ups that come,
thank you
Didn't get any pop-up alert this time so changing the template must have caught it.
damn dirty apes
OK this visit, too.
Just posted my model updates:
www.regimenia.com
My first visit here today...
and no porn popups...
just a horny toad;-)
take care
Post a Comment